Price rise wrapped up in carbon tax

Embattled food and grocery manufacturers are facing further margin pressure this year if supermarkets refuse to allow them to pass on higher packaging costs triggered by the introduction of the carbon tax.

Amcor
, which is set to become Australia’s largest supplier of flex­ible food and grocery packaging through the $238 million acquisition of
Aperio
, plans to raise its prices to recoup the impact of the carbon tax.

“The whole idea of having a carbon tax is for the price signal to find its way through to the consumer," Mr MacKenzie said.

“If we’re not passing the impact of the carbon tax through to our customers and if the customers aren’t passing it onto the retailers and the retailers aren’t passing it onto consumers, then how does the consumer even get a price signal from higher-emitting carbon industries?" he said.

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“We are doing our absolute best to offset that [increase] with productivity improvements in our own business, but the reality is we have to pass those costs on as well to customers."

The danger for manufacturers is that major retailers might refuse to allow suppliers to raise prices to recoup higher costs.

Coles and Woolworths have been locked in a price war – largely funded by suppliers – for two years and show no signs of calling a truce.

Metcash, which supplies IGA supermarkets, has been forced to follow suit and has placed renewed pressure on suppliers for better discounts and trading terms since completing the acquisition of Franklins last year.

Metcash chief executive Andrew Reitzer said Coles and Woolworths were placing “unbelievable pressure" on manufacturers for better deals rather than funding price reductions from their own pockets.

Australian Food & Grocery Council chief executive
Kate Carnell
said Coles had told suppliers in the last month that it will accept no price rises as a result of the carbon tax.

“It’s packaging and all those things that will increase the cost to suppliers, along with energy costs in their own facilities. It’s the cumulative effect of the carbon tax on the whole supply chain that’s the issue," Ms Carnell said.

“All those things come together to produce the price increases that suppliers really need the retailers to accept, but they were told quite definitely that those sorts of price increases would not be considered."

Packaging is estimated to account for about 10 per cent of the cost of producing packaged food and groceries such as chocolate, nappies, smallgoods and biscuits.

Both householders and emissions-intensive, trade-exposed companies will receive compensation to reduce the impact of the carbon tax. But food and grocery manufacturers, which are not large direct emitters, are not entitled to direct cash compensation.

Instead, the government is providing $150 million in grants over six years to encourage food manufacturers to invest in energy efficiency and pollution-reduction projects.

Mr MacKenzie said Amcor was working collaboratively with customers to look for opportunities to jointly take costs out of the supply chain.

“But ultimately we have to push those costs through to customers and customers have to push those onto the consumer. It’s the same with the carbon tax," Mr MacKenzie said.

Amcor, which emits about 1 million metric tonnes of Scope 1 and Scope 2 carbon emissions, is entitled to some compensation in its fibre and glass manufacturing operations.

“We’re not a big direct emitter but we’re a large consumer of energy so it’s 1 million metric tonnes at $23 a tonne," he said.

He estimates the net impact of the tax after industry assistance will be about $15 million, which represents about 1 per cent of the group’s Australasian revenues.

“So we need to pass that $15 million through to our customers," he said. “Fifteen million on EBIT [earnings before interest and tax] margins of 6.1 per cent with a 1 per cent carbon tax coming through is meaningful. It’s the difference between deciding to invest and not."

A report last year by A.T. Kearney for the AFGC estimated that packaging costs could rise by 1 per cent to 5 per cent in the first few years of the carbon tax.

The impact could be much greater once the assistance package for emissions-intensive, trade-exposed companies is removed after 2014-15.

“Given the increasing level of international competition and the heavily concentrated and competitive retail landscape, it will be difficult to pass through cost increases," the report said.

Major manufacturers such as Coca-Cola Amatil have warned that the carbon tax will reduce the competitiveness of locally made products and could force more manufacturers offshore.

CCA chief executive Terry Davis has called for more business offsets, such as accelerated depreciation and research and development incentives, to ensure local food and grocery manufacturers “come out of this on the right side of the ledger".